Supreme Court Affirms Small Business Preference Requirement in Veterans Affairs Contracts in Kingdomware Technologies, Inc. v. United States

Merle M. DeLancey Jr. and Lyndsay A. Gorton

Merle DelanceyLyndsay A. GortonOn June 16, 2016, the Supreme Court issued a decision in Kingdomware Technologies, Inc. v. United States, available here, holding that the Veterans Benefits, Health Care, and Information Technology Act of 2006 (the “Veterans Act of 2006”) requires the Department of Veterans Affairs (“VA”) to conduct a “Rule of Two” analysis before a contract award. The unanimous decision, authored by Justice Clarence Thomas, holds that the Veterans Act of 2006 “unambiguously requires” the VA to use the Rule of Two before awarding a contract under competitive procedures even when the VA will otherwise meet its annual minimum small business contracting goals.

Kingdomware Technologies, Inc. is a veteran-owned small business (“VOSB”) that filed suit after unsuccessfully bidding for a VA emergency-notification services contract that was eventually awarded to a non-VOSB via the Federal Supply Schedule (“FSS”). In its protest to the Government Accountability Office, and subsequent suits in the Federal Circuit, Kingdomware argued that the VA violated the Veterans Act of 2006 by failing to award the contract to a VOSB because it did not award the contract based on the mandatory Rule of Two provision. The Rule of Two states that the VA “shall award” contracts to VOSBs when there is a “reasonable expectation” that two VOSBs will submit bids “at a fair and reasonable price that offers the best value to the United States.” In contrast, the VA argued that to consider the Rule of Two a mandatory provision would be extremely burdensome on the agency and would be inefficient for relatively small and “mundane” contracts that could be fulfilled by the FSS. See our April 5, 2016 blog post for additional discussion of the procedural history of the case, available here.

After first determining that the Court had jurisdiction to decide this case, the Court held that the Rule of Two is a mandatory provision in the Veterans Act of 2006 for all VA competitive procurements. Justice Thomas’ opinion highlights the use of “shall” in the provision, which requires action, in lieu of “may” which often provides an agency with discretionary ability. The opinion addresses the VA’s concern that the Rule of Two is burdensome for mundane purchases by acknowledging that the Veterans Act of 2006 provides an exception for contracts for less than $150,000. Justice Thomas also pointedly notes that the Act does not provide for an exception for “mundane” item orders under the FSS.

The Court’s decision in Kingdomware Technologies will likely have significant impacts on veteran-owned and non-veteran-owned businesses alike. The Court’s decision may lead to additional bid protests and litigation to determine whether the Rule of Two is met by bids that provide the “best value” to the VA. The Court’s decision also creates an incentive to create VOSBs, and for larger contractors to potentially team with VOSBs to be able to bid on VA contracts. The VA is also incentivized to create procurements of less than $150,000 whenever possible so that it can use the pre-negotiated rates in the FSS without triggering the Rule of Two. Additionally, the question as to what sort of “search for veteran-owned small businesses” the VA must conduct remains to be seen. For example, can the VA use the FSS without a Rule of Two analysis if it finds a VOSB provider? The Court’s decision will likely be considered a victory for VOSBs, but contractors should continue to monitor how it will be implemented in future VA procurements.